Through the changes, govt intended to plug gaps in FDI policy on ecommerce, but we now have new grey areas.

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Updated: Feb 12, 2019, 06.41 AM IST

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Though GoI considers these changes as a mere reiteration of earlier policy, the market reaction and analysis of these changes reveal that the new obligations on marketplace companies go much beyond reiteration.

By Pralok Gupta

Ecommerce companies in India are having a troubled time, as the foreign direct investment (FDI) policy changes announced in December 2018 took effect from February 1. Though GoI considers these changes as a mere reiteration of earlier policy, the market reaction and analysis of these changes reveal that the new obligations on marketplace companies go much beyond reiteration. They have created new obligations for a marketplace ecommerce model in India.

The applicability of the ‘group companies’ concept has been turned on its head. Earlier, the group companies obligation was applied on vendors. Now, it is applicable to marketplace entities. Accordingly, the inventory of a vendor will be deemed to be controlled by an ecommerce marketplace entity if more than 25% of the purchases of such a vendor are from the marketplace entity or its group companies. This new criterion for considering vendors’ inventory as the inventory of the marketplace entity has resulted in a substantial change in the business model of marketplace entities.

The onus of conforming to this provision is on the marketplace entity through statutory audit to be submitted to the Reserve Bank of India (RBI). It seems that the problems of implementation are not taken into consideration while devising this new criterion. First, how does a marketplace entity assess whether more than 25% of purchases of a vendor are from the marketplace entity or its group companies? The marketplace entity, after all, will not have access to books of accounts of thousands of its vendors.

And even if this is included as a contract condition by the market place entity with its vendors, what if the vendor changes name and purchases the same goods from the former with a different name? Who will audit the vendors? The statutory audit seems to be only for marketplace entities, not for vendors.

Checks on the Marketplace Earlier policy required that an ecommerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or its group companies. The new policy does not have any such provision. One is not sure whether this condition is now withdrawn or still in place.

There are other new obligations for marketplace entities. First, an ecommerce marketplace entity, or other entities in which the ecommerce marketplace entity, has direct or indirect equity participation or common control, should provide fulfilment, logistics, warehousing, marketing, payments and financing to vendors on the platform ‘at arm’s length’ and in a fair and non-discriminatory manner.

Second, cashback provided by group companies of a marketplace entity to buyers shall be fair and non-discriminatory.

Third, an ecommerce marketplace entity will not mandate any seller to sell any product exclusively on its platform. Fourth, an ecommerce marketplace entity will be required to furnish a certificate, along with a report of statutory auditor to RBI by September 30 of every year, for the preceding financial year.

Now, through these policy changes, GoI intended to prevent violation of the earlier FDI policy on ecommerce and circumvention of restrictions on multi-brand retail trading. But, instead of plugging the gaps, we now have new grey areas.

First, there is now an ambiguity with regard to ownership or control of inventory. On one hand, it prevents ecommerce entities providing a marketplace from exercising ownership or control over the inventory. On the other hand, it specifies that the present policy does not impose any restriction on the nature of products that can be sold on the marketplace. This would imply that the present policy does not prevent selling of private labels. By their nature, private labels are owned by the entities creating them. Thus, it could mean that inventory ownership in the form of private labels is allowed.

The second ambiguity is with respect to cashback provided on ecommerce platforms. The policy requires that cashback provided by group companies of a marketplace entity to buyers shall be fair and non-discriminatory. What about cashback provided by a marketplace entity itself and not by its group companies? Does the ‘fair and non-discriminatory’ clause not apply to cashbacks provided by the marketplace entity itself ?
Are You Being Served?Third, it specifies that in the marketplace model, goods and services made available for sale electronically on a website should clearly provide name, address and other contact details of the seller. Post-sales, delivery of goods to the customer and customer satisfaction will be the seller’s responsibility. What about services? Since this specifies satisfaction only with respect to goods, does that mean any dissatisfaction with regard to post-sale delivery of services will not be responsibility of seller?

These are grey areas that need quick clarification.
The writer is associate professor, Centre for WTO Studies, Indian Institute of Foreign Trade, New Delhi

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)